The federal government’s main anti-foreclosure program isn’t winning many friends these days because of its poor track record in getting banks to modify mortgages for cash-strapped borrowers.
Of the roughly 1.4 million borrowers who entered the loan modification program, about half were kicked out and did not get the amount of money owed on their mortgage reduced.
Critics of the government’s Home Affordable Modification Program, or HAMP, say it’s now time to give a fresh look at other ideas to stem the wave of foreclosures. Below are three proposals that are generating the most interest.
As far back as 2008, Glenn Hubbard, an economic adviser to former President George W. Bush and now a professor at Columbia Business School, has been pitching a plan for a government-backed refinancing program.
Hubbard and his Columbia colleague Christopher Mayer want to use Fannie Mae and Freddie Mac to prod mortgage servicing firms to refinance loans for some 30 million borrowers with high-interest rate mortgages. The Columbia professors, who contend their plan would cost nothing to taxpayers, propose the new mortgages would be folded into a new round of mortgage-backed securities issued by the government-sponsored finance firms.
The program would target cash-strapped borrowers who are current on their payments but face a risk of declining income and slumping home value.
But to some critics this smacks too much of another housing bailout and to date the measure has drawn little enthusiasm from lawmakers.
Some say it’s time for the American Dream to include renting a house as well as owning one. And supporters of this move away from home ownership are the biggest proponents of a so-called right-to-rent program.
One version of the plan, which was proposed by Westwood Capital managing partner Dan Alpert in 2008, would offer delinquent borrowers an option of renting their foreclosed homes at a market rate for five years. The homeowners-turned-renters then would have a chance to buy the house at market value down the road.
The plan would require legislation but it is attractive to some because it forces both borrower and lender to compromise. The borrower gets to stay in the house as renter, but loses the deed to the home. The lender, on the flip side, gets forced to accept a lower-than-original payment.
"It does create losses for the banks, but it avoids the sort of fire-sale environment," Alpert said.
The so-called "cramdown" proposal takes the mortgage dispute to court, allowing struggling homeowners to plead to a federal judge for lengthened loan terms, interest rate cuts or reductions in mortgage balances by filing for bankruptcy.
Not surprisingly, the word "bankruptcy," attached to the idea of delinquent borrowers, has run into a lot of resistance on Capitol Hill.
But cramdown supporters, including many bond investors, like the idea because it deals with a major flaw with HAMP, which is a failure to address second liens and home equity loans tied to a property.
Barbara Novick, vice chairman of BlackRock Inc., said a special bankruptcy chapter could be created just for mortgage cramdowns to allow a judge to consider all of a borrower’s debts and craft a solution that would force interested parties to compromise.
Not surprisingly, the idea of giving bankruptcy judges added power does not sit well with many banks.
Then again, no program for fixing the nation’s housing woes is going to make everyone happy. And no plan completely will lift the system from the epidemic of foreclosures. But a consensus is growing that it is time to try something new given HAMP’s poor track record.
As Columbia’s Mayer said: "What we need are permanent solutions."
